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Business

What do Walmart, BMW and Maersk have in common – besides being among the world’s largest companies? Each is also a family business, with a significant percentage of shares owned by, respectively, the Walton, Quandt and Moller families.

Unlike these three multinationals, however, most family businesses – whether defined by equity ownership, board representation or senior management authority – are small companies, rather than big ones.

Indeed, despite the fact that the vast majority of companies start life as a family business, those that grow don’t tend to stay that way.

Globally, fewer than 30% of family-owned businesses survive to the third generation as family-run concerns. Looking at the S&P 500, we see that less than one-third of such firms are currently controlled by a founding family.

Worldwide, the significant majority of family-owned companies are, of course, unlisted. Among those that are listed, unsurprisingly, nearly all are small and mid caps.

For investors interested in targeting family businesses, this poses a double challenge. First, family-owned businesses are not homogeneous, and there is no listed index of them. Second, analyst coverage of the broader small and mid-cap segment is patchy, at best.

Consequently, it’s difficult to generalize about the performance of family-owned businesses. Nevertheless, there are a range of compelling reasons to look long and hard at the opportunity listed family businesses represent.

Family-owned businesses, generally speaking, benefit from especially keen market insight, an unusually deep commitment to success and a particularly stable long-term vision. There is also growing evidence that family businesses take a more disciplined approach to capital allocation, have stricter standards of corporate governance and, ultimately, generate higher and more stable returns.

All of these factors support the so-called “family business premium.”

As previously mentioned, the majority of listed family-owned companies are small and mid caps. This is a second competitive advantage: as history shows, small and mid-cap stocks consistently outperform large caps over the long term.

Today, analyst consensus is that large-cap earnings per share (EPS) will decline slightly in 2016. Over the same period, small and mid-cap EPS is expected to record nearly double-digit growth – justifying paying a premium for quality assets, especially as that premium is at an historical low.

Family-owned European small and mid caps currently hold special appeal. That’s partly because their geographic exposure tends to be more local than international, with greater exposure to the relatively stable European market than to more volatile emerging markets – which have been buffeted by years of slumping commodity prices and declining capital inflows.

That said, family-owned European small and mid caps may not be right for day traders looking to turn a quick profit before the market closes. Because the appeal of such firms is based on their underlying quality, they should rather be seen as potential buy-and-hold investment opportunities.

Such long-term perspective is only fitting for family-owned concerns. After all, such businesses typically focus less on the current quarter than the next quarter-century, when the succeeding generation will come of age.